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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Computation of liability: introduction to basis periods

S197-S202 Income (Trading and Other Income) Act 2005 (ITTOIA 2005)

An individual who carries on a trade, profession or vocation is taxed on the profits arising in the ‘basis period’ for the tax year.

The general rule is that the basis period for a tax year is the period of 12 months ending with the trader’s accounting date in that year. The accounting date is the date in the tax year to which accounts are drawn up.

Different rules apply in the early years after the trade commenced, to the year of cessation, and for tax years in which there has been a change of accounting date. However, the basis period for a tax year always ends in that year.

Hence these rules are known as the ‘current year’ basis period rules. They have applied:

  • since 1997-1998 if the trade commenced before 6 April 1994
  • since 1994-1995 if the trade commenced on or after 6 April 1994

Different rules applied before the introduction of self assessment for Income Tax, in which the basis period for a tax year usually ended in the year before. These rules are known as the ‘previous year’ basis period rules.

Structure of this guidance

This guidance is divided into five main parts:

  • The normal rules for determining basis periods (S198-S202 ITTOIA 2005), see BIM81010.
  • Special rules where there is a change of accounting date (S214-S219 ITTOIA 2005), see BIM81035.
  • Apportioning profits and losses to basis periods (S203-S206 ITTOIA 2005), see BIM81065.
  • Giving ‘overlap relief’ for overlap profits (S205-S220 ITTOIA 2005), see BIM81075.
  • The ‘previous year’ rules and the transition to the ‘current year’ basis. See BIM81100.